“One of them is lying.” This was a Brazilian banker’s summary of the discrepancy between the Brazil’s stock market and its currency. “The question is, which is it?”
Is the Bovespa – trading at record highs – an accurate picture of the country’s financial health? Or is it the currency that is the real indicator – languishing as it is north of $5.50 – a warning that the share prices have dislocated from their economic fundamentals?
Perhaps the country’s deeply real negative interest rates – inflation is over 5% and the Selic is just 2.75% – might be the biggest fraud, artificially pushing stocks higher and the real lower.
This banker inevitably went on to talk about Brazil’s gushing pipeline of equity issuance – R$100 billion is poised to be issued in the country.
Unless something happens to make markets snap shut soon, 2021 will be another record year – showing that companies are rushing to make hay while the sun shines.
So far, investors remain hungry, though there are early signs of flagging appetite as they demand discounts to participate in the latest wave of IPOs. The proportion of deals that are closing below the bookrunners’ pricing range is rising.
When selling equity is such a no-brainer – is it really a good time to buy?
The question is, at these levels, would you be short the Bovespa or long the BRL?
The country has been rocked by corruption scandals, a fiscal-inspired recession and a presidential impeachment
I am in the same camp as the banker: it is the stock exchange that is the big fat liar. There is going to be very little bounce in Brazil – the country that has long been known for its “chicken flight” GDP: short, erratic, sharp upflights out of recessions before returning to ground.
But now the chicken is too full up with debt to defeat gravity for even a short while.
Meanwhile, the currency’s fall is structural.
The real peaked at a heady R$1.54 in April 2011 – a few months after Euromoney opened its São Paulo office.
Then, there was such consensus in the optimism among bankers it was hard to see that it wasn’t the cold reality of a country lifting off. But the decade since has been a hard one for Brazil. The end of the commodity super-cycle took the wind out of the economy’s sails.
In the last 10 years, the country has been rocked by corruption scandals, a fiscal-inspired recession and a presidential impeachment.
Hunger index
Brazil has seen droughts and floods, and the election of a far-right president who was unable and unwilling to tackle the pandemic with anything resembling responsibility.
The result has been a spike in poverty, and the country’s hunger index is back to 2004 levels: 116 million Brazilians face food insecurity; 43 million (20.5%) of the country do not have enough to eat and 19 million (9%) are starving.
Eerily, last year also saw a plague of locusts in the south of Brazil.
So, of the four horsemen of the apocalypse, we’ve seen famine, flood and pestilence in recent years.
Surely, though, there’s no danger of seeing the red horseman of war riding down Faria Lima?
The scary truth is that it is not inconceivable.
The same mix of ingredients that led to the insurrection in Washington after Trump’s election defeat are brewing here – only in a Brazilian kiln, which threatens an even more explosive result.
President Jair Bolsonaro is trying to co-opt the military, relax laws around gun ownership to arm his supporters and spread doubt about the electoral system that put him in power in case he loses next year’s election.
Of course, that is the worst-case scenario. However, it is much easier right now to imagine another disaster befalling Brazil than a return to the optimism of the 2010s.
